Probability of zone change in NJ eminent domain cases

The Supreme Court of New Jersey, in a 3-2 opinion written by Justice Jaynee LaVecchia, reversed and remanded Borough of Saddle River v. 66 East Allendale, LLC, overturning a jury verdict for just compensation in the amount of $5,250,000. Justice Barry T. Albin, joined by Chief Justice Stuart Rabner, wrote the dissenting opinion. (Download the opinion).

When the state or a municipality exercises the power of eminent domain, the determination sought through court action is the amount of just compensation, the value of the property evaluated in light of its highest and best use, which is ordinarily calculated in accordance with current zoning ordinances. However, if there is a reasonable probability that a zoning change will be granted, valuation may include an assessment of a change in the permitted use of the property, or a premium. In State by Highway Commissioner v. Gorga and State by Commissioner of Transportation v. Caoili, the Court held that a determination of reasonable probability of a zoning change must be made by the judge before the evidence is presented to the jury. The Supreme Court reiterated the gatekeeping duty addressed in both Caoili and Gorga:

The court must act as a gatekeeper to assess whether there exists sufficient evidence of a reasonable probability of a zoning change to permit an alternate use for a property taken under eminent domain to be considered when valuing property for just compensation.

In this case, the Supreme Court found that the trial judge did not perform his gatekeeping function at the proper juncture. He did not consider the record or conduct a preliminary N.J.R.E. 104 hearing before allowing the jury to consider the reasonable probability of a zoning change. Instead he deferred any decision regarding the defendant’s experts’ opinions that a change in zoning was reasonably probable until the trial was in progress. The Supreme Court remanded the case after finding that the expert’s opinions lacked a proper basis, and were speculative and conclusory. It also specifically held that the court’s gatekeeping function is to be exercised prior to the jury’s deliberation on compensation.

In further clarification of Caoili, the Supreme Court stated that it is only after the trial court has first determined that the evidence is of a quality to allow for consideration of the reasonable probability of a zoning change that the jury may be permitted to assess a premium based on the change. The Supreme Court refined its analysis by confirming that not every condemnation action involving a possible zoning change requires a N.J.R.E. 104 plenary hearing prior to trial. It clarified that the trial court should first determine whether it can render its determination as to reasonable probability on the papers alone. If the issue cannot be resolved by review of the record, then it should be heard and decided prior to trial. The Supreme Court emphasized the requirement that the trial court render its determination based on the standard that would govern the particular zoning change, and criticized the trial court for failing to engage in the analysis. In a dissenting opinion, Justice Barry T. Albin, joined by Chief Justice Stuart opined that the majority failed to give proper deference to the trial court’s evidentiary rulings and to the factual findings made by the jury.

The ramifications of the Supreme Court’s discussion of its gatekeeping functions are clear. It is likely that trial judges will increase their scrutiny of expert testimony prior to trial to ensure that all relevant criteria is met regarding variance approval before allowing the jury to consider evidence of the reasonable probability of a zoning change. Though a N.J.R.E. 104 hearing is not required, trial judges will now hear argument if the issue of probability cannot be resolved on the papers.

The Supreme Court also elucidated the details of the analytical process once the issue reaches the jury. During the actual determination of a just compensation award that takes into account a premium based on the reasonable probability of a zoning change, the court stated:

The jury first must value the property in its current condition, considering the zoning at the time of taking , which establishes base value. And, second, the jury may consider the probability of the future zoning change or variance approval in determining the premium a buyer and seller would fix to the property. That premium is added to the base value and includes an assessment of the risk of the change occurring or being approved. (citations omitted.)

Under Caoili, property can be valued by either valuing the land as if the zoning change had taken place and then discounting the value to reflect the likelihood of the change and risk involved, or by valuing the land under the existing land-use restrictions and then adding value to reflect the likelihood of change. The method for determination of value is generally left to the judgment of the appraiser. It is unclear whether the Supreme Court intended to change the law in this regard or if it simply found it unnecessary to delineate the valuation process in detail. We anticipate that the court may require the preparation of two appraisal reports: the first, an appraisal of the property as presently zoned, and the second, an appraisal of the property as rezoned. The difference, with a discount for some uncertainty in the zoning process, should reflect the premium that a willing buyer would pay for the property in anticipation of the rezoning.


Edvie M. Castro contributed to this blog entry.